SMPC Calls on Bank of England to Reconsider Its Approach to Monetary Policy

Members of the Shadow Monetary Policy Committee, a group of distinguished economists that meets quarterly at the Institute of Economic Affairs, voted for interest rates to remain unchanged at their meeting on Thursday, 16th January. Current world and economic conditions do not warrant a change in interest rates. However, there was real concern that there may be a fall in consumption, triggered by falls in house prices and that this in turn would lead to a slow down in the growth of monetary aggregates and require a loosening of policy.

The Committee agreed that, in such circumstances, changing short-term interest rates might not be an effective monetary lever and as such, there was a serous danger of deflation. The Committee called on the Bank of England to consider other methods of controlling monetary policy, by targeting monetary aggregates more directly and implementing debt buybacks.

The Committee also noted that there was a wide divergence between the inflation measure the Bank of England is targeting and wider measures. It might be time to reconsider which inflation measure is targeted. There is a danger of general deflation in the economy as a whole resulting from targeting a measure of inflation that is distorted upwards.

The minutes of the meeting are attached.

Minutes of the meetings of all 2002 and 2003 Shadow Monetary Policy Committee meetings are available from